Exchange Rate

Real Exchange Rate: "The relative price of goods across other countries taking into account the varied rates of inflation"

Nominal ER x (PL in country / PL Abroad)

Low interest rates decreases flow of hot money

Decreased hot money flows decreases demand for pound

Will cause the ER to decrease

Causing an increase in strength of the pound

Strong pound means exports will be more expensive

Higher price will mean fall in international competetivness

However...

Depends on Price Elasticity of exports

Floating exchange rate may self correct in long run

Real ER depends on PL in other countries so is dependant on performance of trading countries

Monetary motives may be priority so is necessary to lower interest rates

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Wage Costs

Why do wage costs affect international competetivness?

Higher wage costs means higher AC for firm

Higher Costs for firm means they must increase price to keep revenue constant

Higher price will decrease demand

Decreased demand shows reduction in competetivness

To make international comparisons, figures are converted to a single currency and expressed as an index

However...

Change in demand will depend on elasticity highly elastic good may be able to change price and remain competitive

Elasticity of exports depends on how dependant other countries are on that good, this will depend on severity of any trade blocs

Firms may be able to reduce their own wage costs, but this is dependant on that industries union power, and also on goverment imposed NMW

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Productivity

Why does productivity affect international competitivness?

Productivity is measured by comparing output per worker per hour

Higher productivity reduces AC per unit output

Reduction in AC means that price of exports can be reduced

Reduction in price increases demand

Increased demand shows increased international competitivness

However...

Changes in demand depends on elasticity of exports

productivity refers to both capital productivity and labour productivity, both can be improved in the long run. Capital productivity improved through investment in R&D, labour productivity improved by govt investment in education and training

Improvements in capital and labour productivity will be dependant on quality of R&D and education which is difficult to measure and impose.

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Non Wage Costs

National insurance

Health and safety regulations

Enviromental regulations

Employment Protection

Company pension schemes

All of the above will mean increased costs for the firm. Some of these mary be a lot more promiment in one particular country, for example employment protection is extremley low in the labour intensive industrial parts of china and south korea, however things such as health and safety regulations are quite common globally, hence no particular country will be at a great disadvantage with respect to that.